Venture Capital Market Research Articles

THE RATIONALITY FOR GOVERNMENT SPONSORED VENTURE CAPITAL FUNDS IN LITHUANIA: INNOVATION PERSPECTIVE

It is widely accepted that early stage SMEs encounter many obstacles which restrict their innovation performance. Limited access to finance is considered as the key obstacle for business development in its early stage. Market failures emerging due to lack of risk capital provision to early stage firms are one of most popular rationality for governments’ intervention in the venture capital market. Following this purpose many countries around the world are launching various public policy schemes in order to diminish lack of supply of capital to early stage SMEs, for instance Yozma in Israel, SBIC in U.S., Labour Sponsored Venture Capital Corporation in Canada and etc. In this paper we refer to government sponsored venture capital fund as a venture capital fund raised from public and private sources in order to meet public policy objectives – to create favourable environment for early stage business development and to give an impetus for innovation creation potential in SMEs.DOI: http://dx.doi.org/10.5755/j01.em.17.1.2272

The Innovation Gap of Italy’s Production System: Roots and Possible Solutions

The lag in innovation in Italy vis-a-vis the other main industrial countries is one of the effects of the fragmentation of the production system into many small firms that have trouble bearing the high cost of RD equity, more suitable than debt for financing innovation, is less common than in other countries. Public incentives for firms have had modest results. To enhance the capacity for innovation some actions should be taken to help firms grow, adopt a more managerial approach, and increase their equity. It is important to support the venture capital market, which is less developed than in other countries. The design and management of public funding for innovation need improvement.

The Market for Venture Capital: Entry, Competition and the Survival of Start-Up Companies

Over the last two decades the number of venture capital (VC) firms actively investing in start-up companies in the US has more than tripled. In this paper we examine (i) the response of incumbent VC firms to increased competitive pressure from less experienced entrants, and (ii) the implications for the funding and survival of start-up companies. We first develop an equilibrium model of the VC market with heterogenous entrepreneurs and VC firms. Each VC firm matches endogenously with an entrepreneur, offering capital in exchange for an equity stake. Our theoretical model predicts that entry of new VC firms has a ripple effect throughout the entire market: All start-ups then receive more capital in exchange for less equity (implying higher pre-money valuations), and become more likely to survive. We then test these predictions using VC data from Thomson One, and find strong empirical support.

Az innovatív kis- és középvállalkozások finanszírozása kockázati tőkével

Closing the gap between the USA and EU venture capital market size is crutial for european innovative small and medium sized companies. As the financial crises started in 2008 weekend the possibilities for external capital, the role of venture capital financing is revaluated. The study analyses the similarities and differences in the legal rules of venture capital fund raising and financing revised by the USA's Dodd-Frank Act, and the European AIMF-directive. The study also suggest the changes in connection with the European Commission's prepared document on the European Venture Capital Fund, and it's effects on the innovative small-and medium sized companies. The conclusion is that the new rules of venture financing both in the USA and Europe sets up significantly more administrative difficulties for funds, but more stability and safe for entrepreneurs.

Economic freedom and cross-border venture capital performance

Abstract We investigate the determinants of cross-border venture capital (VC) performance using a large sample of 10,205 cross-border VC investments by 1906 foreign VC firms (VCs) in 6535 domestic portfolio companies. We focus on the impact of a domestic country's economic freedom on the performance of both VC investments and portfolio companies using a probit model and the Cox hazard model. After controlling for other related factors of domestic countries, portfolio companies, VCs and the global VC market, as well as year and industry fixed effects, we find that a domestic country's economic freedom is crucial to cross-border VC performance. In particular, in a more economically free country, as measured by the raw values of, quartiles of or the ranking in the index of economic freedom (IEF), a foreign VC-backed portfolio company is more likely to pull off a successful exit through an IPO (initial public offering) or an M&A (merger and acquisition), and a foreign VC firm is likely to spend a shorter investment duration in the portfolio company. We also identify interesting evidence on the impact of many other level factors of domestic countries, portfolio companies, VCs and the global VC market on cross-border VC performance.

Интернационализация венчурного капитала: вызовы и возможности

Thomas Gstraunthaler- Leading Research Fellow, Laboratory for Economics of Innovation, Institute for Statistical Studies and Economics of Knowledge, National Research University - Higher School of Economics, E-mail: tgstraunthaler@hse.ru Address: 20 Myasnitskaya str., Moscow, 101000, Russian Federation.Galina Sagieva- Head, Division for Intellectual Property and Technology Transfer Studies, Institute for Statistical Studies and Economics of Knowledge, National Research University - Higher School of Economics, E-mail: sagieva@hse.ru Address: 20 Myasnitskaya Str., Moscow, 101000, Russian Federation.This paper attempts to summarize and systematize the landscape of the global venture capital industry. It presents major basic business models and investment strategies, assesses the contribution of venture capital (VC) to economic growth, and the incentives and constraints for VC’s development, and it identifies research gaps in this area.Venture capital is often regarded as the only source of support for start-ups, particularly for those in high-tech innovative sectors. The authors explore the reasons for this. In contrast to more traditional investors, VCs provide targeted investment, and they maintain a long-term strategic focus. Financial capital is only one benefit they provide for entrepreneurs. They provide industry knowledge and social capital, often vital for success. Also, venture capital serves as an intermediation device in finding further finance. These benefits focus the attention of public administration in venture capital and pro-investment policies to build strength and assure future competitiveness. The authors conclude that governments can only do so much to spur creative thinking and entrepreneurial activities. Their support is best placed in education, oriented toward a culture which rewards competitive and entrepreneurial thinking. Results of such policy mature slowly but they can be vital.In conclusion, the authors point to the need to introduce new and refined research strategies promoting VC. One key focus to study venture capital is to understand how the industry itself is developing through its own drive. It would help to examine comparatively a country’s initiatives, which would allow policy makers to understand where the industry is going and how best to support or participate in growth. It would also allow distinguishing among segments of the venture capital market. Finally, further analysis of the VC industry should be conducted through the prism of its internationalization.

The Evolution of the Venture Capital Market in China: Current Trends in Venture Capital Financing Strategies andInvestment Preferences

This article examines the development of the venture capital (VC) industry in China over the past two decades. In recent years, the industries of interest for investment among VCs spread from information technology to other areas such as the financial services and the heavy manufacturing sectors. From 1990 to 2010, VC seed money and start-up funding significantly decreased, but, pre-IPO VC financing increased considerably. There has also been a shift in the sourcing of VC in the China market away from the few traditional market players such as Japan, the United States, and the United Kingdom in the earlier years. Today, Middle Eastern and European countries (e.g., Israel, UAE, Netherlands, and Finland) are important purveyors of VC.This report summarizes the difficulties encountered in the development of the VC industry in China and provides a number of successful IPO examples of Chinese ventures backed by VCs to illustrate the investment opportunities for VCs.

Specialization and Competition in the Venture Capital Industry

An important type of product differentiation in the VC market is industry specialization. We estimate a market structure model to assess competition among differentiated participants in the venture capital (VC) industry. The impacts of competitor presence on profits appear markedly different than in other industries with differentiated competitors. Consistent with the presence of network effects that soften competition, these patterns are concentrated in markets that exhibit dense organizational networks among incumbent VC firms. Markets with sparser incumbent firm networks, by contrast, exhibit competitive patterns that resemble those of other, non-networked industries.

Access to finance for innovation: the role of venture capital and the stock market

Financial constraints for young and small firms can prevent them from contributing to innovation and the creation of new jobs. The paper analyzes two of the several institutional mechanisms implemented to overcome that hurdle: the development of the venture capital market and access to the stock market. The analysis is based on the information provided by two of the scoreboards used to monitor innovative activity in Europe: the IUS (Innovation Union Scoreboard) and the R&D Scoreboard. The former was used to study the determinants of venture capital/GDP intensity in Europe. The second was used to try to assess the stock market's contribution to R&D investment. The results show that, in the first case, the venture capital market complements structural features such as R&D intensity and market capitalization, is more volatile, and seems uninfluenced by competition-adverse regulations; in the second case, the analysis indicated that unlisted SMEs are more research intensive.

The Scale, Growth and Returns of Informal Venture Capitalists’ Investments in Italy

Start-ups need capital to make new investments, but they don’t have access to debt capital because of their inability to produce positive cash flows. The economic player who best suits seeds and start-ups financial needs is the Business Angel, a private investor who finance newly constituted firms with his own savings, filling the equity gap. Given the Italian economic structure based on SMEs, the presence of Business Angels is very important. This study is the first attempt to present a wide picture of the Italian informal venture capital market, and analyzes data on Italian transactions and personal features of Italian Business Angels gathered during 2007, 2008, 2009 and 2010 with the support of IBAN (Italian Business Angels Network). Our analysis shows that the Italian informal venture capital market grew significantly in the last decade (CAGR 2000-2010: 56%) and the number of operations is rising despite economic stagnation. Moreover, Italian Business Angels features are converging to those of Angels of more developed markets in terms of education, amount invested, number of yearly operations, exit strategy, etc. Furthermore, a regressive analysis on determinants of business angels returns has been performed, which shows that the exit strategy and the industry financed have a significant impact on the IRR of angels’ investments.

Corporate Venture Capital and Its Contribution to Intermediate Goods Firms in South Korea*

Set by government, corporate, financial and individual sources, venture capitalists in Korea have adapted themselves to the new and uncertain venture capital market through stand-alone and syndicated investments. The present study raises questions about whether various financial sources contributed differentially to their portfolio firms during the market boom of 2000. Results show that no single capital source showed better performance, and only corporate venture capitalists contributed to intermediate goods firms. The latter finding might reflect the unique ability of corporate venture capitalists to use vertical value-chain linkages for their investments.

Strategies on Building Venture Capital Industry in the Canary Islands

1. Aušra Gvazdaityte 1. is a master’s student at Vilnius Gediminas Technical University in Vilnius, Lithuania. (aushragva{at}yahoo.com) <!-- --> 1. To order reprints of this article, please contact Dewey Palmieri at dpalmieri{at}iijournals.com or 212-224-3675. This article analyzes theoretical venture capital (VC) industry development aspects. We present statistical data of social and economical impact related to U.S. and European VC market examples. Reviewing the taxes and fiscal regime initiatives specific to the Canary Islands, we create a VC impact model for social and economical development. We summarize experts’ opinions regarding impediments to a successful VC market in the Canary Islands. Summarizing theoretical and practical aspects and following other countries’ examples, we suggest the models and recommendations on how to build venture capital industry in the Canary Islands. TOPICS: [Private equity][1], [exchanges/markets/clearinghouses][2], [frontier][3], [fundamental equity analysis][4] [1]: https://www.pm-research.com/topic/private-equity [2]: https://www.pm-research.com/topic/exchangesmarketsclearinghouses [3]: https://www.pm-research.com/topic/frontier [4]: https://www.pm-research.com/topic/fundamental-equity-analysis

Venture capital informale e imprenditorialità

Two organized systems that are recently playing an important role in the organization of the informal venture capital market are angel groups and business intermediaries. While the former has grown fast in the US, the latter predominates in Europe. US angel groups are alliances made by investors providing a more efficient marketplace for innovative start ups. Business intermediaries are usually founded or supported by public organizations and mainly operate as a matching mechanism. The aim of this paper is to provide an analysis of the activities of these two organization forms. Building on this analysis, special attention is given to the Italian informal venture capital market, where angel groups still don’t emerge and business intermediaries are not really developing the market. Implications for public policy and a new mission for Italian business intermediaries are also discussed.

Economic and capital market antecedents of venture capital commitments (1960–2010)

Using vector autoregression technique, we examine the interrelation between venture capital flows, economic development, capital market fund-raising activities, and capital market valuation, based on annual data of the United States over the past half-century. We find that venture capital commitments appear to be correlated with GDP and capital market valuation. While capital market fund-raising activities (Initial Public Offerings and Seasoned Equity Offerings) are also correlated with venture capital flows, these effects are subsumed by GDP, indicating that the overall economy drives both venture capital flows and capital market financing activities. Analyses from impulse response functions suggest that shocks to GDP have a permanent effect on venture capital flows, while the impact of capital market valuation (Standard & Poor 500 returns) on venture capital flows is rather short lived. Overall, both economy-wide development and financial market fluctuations seem to impact venture capital flows.

Hybrid Venture Capital Funds in Lithuania: Motives, Factors and Present State of Development

Substantial body of academic literature agree that the financial constrain is the core problem in developing early stage small and medium sized enterprises (SMEs). Therefore, venture capital through financing and providing value added services is considered to be an effective tool in increasing regions innovation capacity, fostering economic growth as well as job creation. Thus, financing such promising young ventures, especially those with technological background, is encouraged in many countries through various Governments' initiatives.A wide range of research explores public programmes in enhancing venture capital markets development in various countries either through direct (when Government invest directly in fund) or indirect (for instance, tax relief, etc.) measures. Therefore the present paper focuses on the direct Government intervention in venture capital market development, through investing in venture capital funds (as the co-investor or limited partner) in order to facilitate SMEs through financing its early stage of development. Venture capital funds, pooled by Governments' sources, private and institutional investors, aiming to boost investments in early stage innovative companies, are considered as hybrid venture capital funds in this paper.The article deals with the development of hybrid venture capital funds in Lithuania, which were forced by the European Union (EU) initiative Joint European Resources for Micro to Medium Enterprises (JEREMIE) seeking to increase access to finance the development of SMEs through facilitation of venture capital markets development in various EU regions.There is lack of research focusing on the factors for efficient public policy intervention in the developing hybrid venture capital funds in order to facilitate early stage SMEs. Thus, the problem of the paper covers the question: what are the motives, factors and present state of development of hybrid venture capital funds in Lithuania.The present paper will explore the Government's initiative in Lithuania in terms of JEREMIE initiative. Therefore the paper aims to contribute to research dealing with hybrid venture capital funds' role in boosting regional economies through the financing the SMEs in their early stage of development.The paper finds that Lithuanian venture capital market is in its infant stage, and the Governments' initiative towards creation hybrid venture capital funds definitely will increase the investments in SMEs. Moreover, supply-side, demand-side and macroeconomic factors should be taken into account in the venture capital markets development. And still cautious actions should be set along with the public initiative in order to overcome the negative aspects of venture capital investments, such as lack of transparency, money laundering, etc. http://dx.doi.org/10.5755/j01.ee.22.2.312

Entrepreneurial Finance and Venture Capital Markets: Introduction

Entrepreneurial Finance and Venture Capital Markets: Introduction

Determinants for allocations to Central Eastern Europe venture capital and private equity limited partnerships

Growth expectations and institutional settings in Central Eastern Europe (CEE) seem favorable for establishing a vibrant venture capital and private equity (VC/PE) market. However, the risk capital supply there is rather small in relation to the growth prospects. We examine the determinants of institutional investors' CEE allocation decisions through a questionnaire addressed to limited partners worldwide. Investors in CEE VC/PE limited partnerships are very knowledgeable about the region, they also appreciate other emerging regions, they regard entrepreneurial opportunities in CEE as very favorable, and they attribute local general partners in CEE with a high level of professional quality. In more detail, they appreciate team independence and the match of fund strategies with the teams' backgrounds. As economic growth expectations are fairly high in all emerging regions, investors focus on other allocation determinants, notably on the potential of institutional and cultural characteristics to turn the economic growth into entrepreneurial activism.

Geography and Style in Private Equity Contracting: Evidence from the U.S. Venture Capital Market

We present novel evidence that contracting style and geography matter in financial contracts, in addition to more traditional ingredients based upon financing frictions and formal institutions. We analyze cash flow contingencies included in 1,804 private equity contracts between U.S. venture capitalists (VCs) and U.S. startup companies. These contingencies affect both pricing and incentives. We document a pronounced “California effect”, namely, that California based entrepreneurs receive more lenient contract terms. We find a similar effect if the VC is located in California, or if a non-California VC had large exposure the California market. We further show that contracts are less harsh if the startup is located in a region with a larger VC market, or if the geographical distance between the VC and the company is shorter. This latter finding supports the view that geographical proximity can lower monitoring costs. However, the “California effect” remains large and significant even after we control for such explanations. Our findings cannot be explained by differences in state laws, bankruptcy and tax regimes. We also confirm that it is not that VCs substitute less harsh cash flow contingencies for harsher control rights or for more performance-based CEO compensation. In fact, California contracts are more entrepreneur-friendly in all these dimensions. Our findings suggest that in addition to traditional variables, behavioral norms can lead to a contracting equilibrium. In addition to the “California effect”, we present several other new findings on VC contract design.

Matching and Contracting in the Venture Capital Market

Matching and Contracting in the Venture Capital Market

The Triple-Helix implementation in the Thai Venture Capital industry

This paper explores the Thai Venture Capital (VC) industry based on the Triple-Helix model. In particular, the characteristics of Triple Helix are analysed in terms of the structure of the VC market as well as the tax regulations related to VC funds. The results reveal that the growth of Thai VC market depends on government interacting with universities and industries. However, major problems inhibit the growth of entrepreneurship including the limited number of potential innovative ventures, the tax regulations concerning VC fund registration and the lack of experience in managing investment risk. The paper concludes by examining the policy implications of this work and recommending changes essential to develop the VC industry.